ExxonMobil announced on 5 June that it plans to close one of its oil projects in Azerbaijan in 2003, Reuters reported. Like its rival TotalFinaElf, ExxonMobil has been unable to find enough oil in the Azerbaijani section of the Caspian Sea to continue with the power sharing agreement it currently has with the Azerbaijani state oil firm SOCOR. Nikki Kazimova, a spokesperson for ExxonMobil in Azerbaijan told Reuters, "The exploration period�expires in 2003 and we do not intend to extend this contract after we failed to discover commercially viable reserves." ExxonMobil's decision not to renew its contract for drilling over the Qguz oil block will not affect additional forms of cooperation with Azerbaijan. Kazimova said, "ExxonMobil [has] already invested more than $1 billion in Azerbaijan, which shows that this is a strategic region for us." ExxonMobil participates in five of 21 power-sharing agreements signed by Azerbaijan since the country gained independence. Only 15 of the original 21 projects, totaling $48 billion, are ongoing. The British Petroleum-led Azeri-Chirag-Guneshli project is the only Azerbaijan offshore project to produce oil thus far. (TGP)

RUSSIA-EU TALKS TURN TO GAS LIBERALIZATION (28 May)

During the three-day Russia-European Union summit, which began on 27 May, leaders discussed energy issues. According to Loyola de Palacio, EU energy and transport commissioner, talks with Russia faltered on the issue of European firms re-exporting gas within the EU, Reuters reported. As one of the EU's main gas and oil suppliers, Russia opposes EU efforts to liberalize the gas market. Market liberalization will allow independent suppliers to compete, which will, in turn, drive gas prices down. While the EU is encouraging the opening of markets, Russia's gas monopoly, Gazprom, has continued to defend its long-term contracts, some of which extend for 20 years. Russia argues that such contracts are necessary in order to ensure a return on its investments. The EU agreed to allow Gazprom to maintain its old long-term contracts, but will require Gazprom to alter new ones. After meeting with Gazprom CEO Aleksei Million on 28 May, however, de Palacio said, "There was no new outcome of the meeting." Gazprom wants to maintain the "take or pay" and "destination clauses" within its long-term contracts. According to these clauses, buyers are required to import an agreed upon amount of gas. Buyers are fined for failing to do so. The "destination clause" prevents buyers from re-exporting gas. In response to these terms, de Palacio said, "We cannot accept this because it would mean we are opening the market with one hand and closing it up with another. Our aim is to make it easy for every European company to choose a destination and a country it wants to choose." A second unresolved issue between Russia and the EU is related to pipeline access. Gazprom has historically prevented independent producers from utilizing the pipeline network. De Palacio discussed the issue with Russian Energy Minister Igor Yusufov. Following their meeting on 27 May, de Palacio said, "We got some positive signs that the opening is coming." (TGP)

LUKOIL SEES HUGE CASPIAN OIL OUTPUT GROWTH (4 June)

Russia's largest oil company, LUKoil, announced on 4 June that it will invest billions of dollars in the Caspian Sea over the next two decades, Reuters reported. LUKoil Overseas Chairman Andrei Kuzyaev said the company is already the largest Russian investor in the Caspian. Kuzyaev, who also manages LUKoil's upstream assets from Venezuela to Egypt, stated at an oil conference in Baku: "The Caspian is becoming our overseas top priority. We see our output from this region at 30 percent of our total output by 2020." Kuzyaev said, "By 2020 LUKoil will have invested from $12 to $17 billion in our Caspian and Central Asian projects." LUKoil, which produces 1.6 million barrels of oil a day, was criticized by investors for slow production growth. According to critics, the company's opponents doubled production and have been boosting Russia's output for four consecutive years. LUKoil's leadership believes that situation will change as soon as its long-term investments in Russia's north and Caspian turn into real oil. The company pledged to almost double oil and natural gas output by 2010. "LUKoil is a unique company, which has projects in every lucrative area of the Caspian Sea, including the Azerbaijani, Kazakh, and Russian sectors. We count on a huge synergy effect," Kuzyaev said. LUKoil drilled six positive exploration wells on its four fields in the Russian sector of the Caspian in May. Hydrocarbon reserves in the region are expected to reach one billion tons of its oil equivalent.

According to Kuzyaev, the company is also aiming to expand operations in Kazakhstan. "Azerbaijan is the only Caspian region producing offshore oil so far, and it has a transport infrastructure. But investors must have both today and tomorrow in their portfolios, so Kazakhstan is the future," Kuzyaev said. He added that the Kazakh government plans to approve a national offshore oil strategy and put a number of lucrative blocs up for tender. Kazakh offshore work has been limited to the ENI-led exploration of the Kashagan field, which experts believe may be the world's biggest oil find since Alaska's Prudhoe Bay. LUKoil is holding negotiations with the Kazakh government. According to Kuzyaev, the company is particularly interested in acquiring new exploration licenses. LUKoil is especially interested in the Kurmangazy oil bloc, which neighbors Kashagan in the northern part of Kazakhstan.

LUKoil owns a 12.5 percent stake in the Caspian Pipeline Consortium (CPC) together with BP. CPC has shipped Kazakh crude oil to the Russian Black Sea port of Novorossisk since 2001. Together with BP, it also has a 5 percent stake in the mammoth Tengiz oil field in Kazakhstan, operated by Chevron. In Azerbaijan, LUKoil owns 10 percent of the country's biggest oil producer, Chirag, and another 5 percent in the Chakh-Deniz gas project. (IAM)

BUSINESS ALERT

MOSCOW'S FURNITURE GIANT TAKES ON ST. PETERSBURG RETAILERS (5 June)

The Moscow company La Max, which owns the Grand and Tri Kita furniture retail centers in Moscow, is going to open a shop in St. Petersburg. La Max will build a 30,000 square-meter store in the Primorskoye region, in the northern part of the city. La Max received permission for preliminary development on a three-hectare plot from the St. Petersburg's Investment Tender Commission last week, "The St. Petersburg Times" reported. Project Director Viktor Serpov said that the company intends to invest from $10 to $11 million in the store, which currently is called Peter-Grand. According to Serpov, St. Petersburg has enough good furniture shops, but they are small and present a limited selection of goods. The Finnish supermarket Super-Siva, the Finnish furniture shop Sotka, and the Lenta Cash-and-Carry are all located not far from the development site. The chairman of the City Center for Work With Bank Loans, Nikolai Asaul, said that this area is becoming a center for many of the major retail complexes. Lenta General Director Oleg Zherebets believes that the turnover of his store will rise by 20 to 30 percent as a result of the increased flow of customers to the zone. Completion of the project will make Peter-Grand the largest outlet in the city's furniture market. Mebel-City is currently the largest furniture store, covering 6,000 square meters with plans to increase its area by another 8,000 square meters in 2003. The general director of the St. Petersburg Guild of Furniture Retailers, Dmitrii Lenkov, thinks that La Max will not be competition for Mebel-City, which sells domestically produced furniture. (IAM)

ECONOMIC NEWS & BUSINESS STATISTICS

RUSSIAN ATM NETWORK TO EXPAND (6 May)

The National Cash Register (NCR) Corporation confirmed a series of automated teller machine (ATM) sales to Russian banks. NCR is a global technology company based in the U.S. and employing more than 30,000 people worldwide. Russian Bank Vozrozdenie extended its relationship with NCR by ordering 70 NCR Personas ATMs. The bank is expanding its ATM network and external full-function machines, such as those NCR has to offer, meet the bank's requirements. In St. Petersburg two major Russian banks, Industrial and Construction Bank and Bank Baltyisky are expanding their presence in the ATM market as well and have signed contracts for 45 and 50 ATMs, respectively. According to Business Wire, NCR will provide hardware, installation, and support services. NCR will also supply Russian Alfa-Bank with 150 ATMs. In December 2001, Bank of Moscow signed a contract with NCR for the delivery of 400 ATMs over a two-year period. According to Simon Rubin, the NCR Financial Solutions Division's vice president of marketing for Europe, Middle East, and Africa, NCR continues to expand its business in the Commonwealth of Independent States (CIS). In Ukraine, the company has signed a $2.1 million contract with Ukraine's second largest bank, Aval Bank, for the purchase of Personas 84 and Personas 70 ATMs. According to statistics, there are 40 ATMs per million people in Russia compared to 1,200 ATMs per million in the U.S. and 553 ATMs per million in Western Europe. (IAM)

U.S. CHICKEN LEGS ARRIVING IN RUSSIA (3 June)

U.S. poultry began arriving in St. Petersburg on 3 June for the first time since Russia imposed a ban on U.S. imports on 15 April, Interfax reported. Russia lifted the ban after the U.S. agreed to tighten control over the exported meat's quality. The first new shipment of "Bush's legs," as the chicken is known in Russia, included 6,500 tons delivered to the city's trade port and an additional 4,000 tons delivered to the fishing port. Russia provides the largest market for U.S. poultry with revenues of $600 million. Russia and the U.S. are currently working on a new treaty concerning the supply of poultry that will replace the one implemented in 1996. (TGP)

MOLDOVA TO SELL STAKE IN NATIONAL TELECOM MONOPOLY (3 June)

The Moldovan government of Prime Minister Vasile Tarley has decided to sell a 51 percent stake in the country's national telecom monopoly, Moldtelekom, Reuters reported on 3 June. The government's decision comes amidst pressure from the International Monetary Fund (IMF) and World Bank, which have stalled loans to Moldova as a result of its failure to privatize. According to Reuters, the government released a statement saying, "The tender will take place from June 7 to August 9. Bids are accepted until August 2." Only telecom companies with assets of $300 million and up, an annual turnover of $150 million, and a customer base of at least one million, will be allowed to bid. The government is also expected to award Moldtelekom a license to provide mobile service in the country. This will be the third license of its kind awarded in Moldova. If the sale is successful and the IMF and World Bank agree to reinstate loans to Moldova, the country will use the funds to avoid defaulting on its foreign debts. The government must pay $200 million in debt servicing in 2002. The principal on $75 million in eurobonds is due by the end of June. (TGP)

POLITICAL ECONOMY

THE EBRD TELLS RUSSIA TO DIVERSIFY ITS ECONOMY (4 June)

The European Bank for Reconstruction and Development (EBRD) said on 4 June that Russia must increase its economic efficiency by diversifying its economy. At present, the Russian economy is heavily dependent on oil and gas. Although the oil sector has been gradually transformed, the gas sector continues to lag behind in reform. The EBRD also said that Russia needs to reform both its banking sector and judiciary in order to increase business confidence. Speaking at a European Business Congress meeting, EBRD President Jean Lemierre said, "Russia will not be able to sustain a high rate of growth without a strong banking system," Reuters reported. Lemierre praised Russia for its positive recovery from the 1998 financial crisis and said that now is the time for Russia to work toward "sustainable international competitiveness." Economic development in Russia is of particular importance to the EBRD, since the economic success or failure of Russia is likely to influence the entire region. (TGP)

RUSSIA -- BELIEVE IT OR NOT

RUSSIAN BUSINESSMAN ARRESTED ON CHARGES OF CAVIAR SMUGGLING (4 June)

Viktor Tsimbal, the Russian owner of Miami-based firm Beluga Caviar, was arrested on 6 June on charges of smuggling and selling black-market caviar in violation of international wildlife protection laws, Reuters reported. Federal officials said that Tsimbal had been involved in the recruitment and planning of 48 caviar-smuggling trips between 1998 and 1999. Tsimbal is suspected of hiring three couriers to smuggle caviar into the U.S. from Russia and the Caspian Sea region under the false label of lumpfish roe. Sturgeon, which supplies the caviar, is endangered and thus protected. Given that the caviar sold from sturgeon eggs can bring up to $1,000 per pound on the U.S. market, it is difficult to eliminate smuggling. According to Tom Sansonette, assistant attorney general for the U.S. Department of Justice's Environmental and Natural Resources Division, "Recent prosecutions have demonstrated that the caviar trade is plagued by unscrupulous black market trafficking that requires vigorous enforcement," Reuters reported. Tsimbal, who is facing multiple charges including conspiracy, smuggling, money laundering, and obstruction of justice, could face up to 95 years in prison if convicted. Tsimbal is not alone in facing caviar-smuggling charges. The president of Maryland-based U.S. Caviar and Caviar is currently serving jail time for illegally importing more caviar from Russia than the country is allowed to export per year. (TGP)

WHO IS IN? WHO IS OUT?

KAMAZ TO FIRE 15,000 (30 May)

One of Tatarstan's largest employers, truck maker KamAZ, is about to fire one-third of its employees, a senior member of the Tatarstan government announced on 29 May. Deputy Prime Minister and former KamAZ board member Ravil Muratov said at a meeting in Chally, a city where KamAZ is located, that the automotive giant will soon fire 15,000 employees. According to "The Moscow Times," he advised employees: "To try [their] hand at business." A KamAZ secretary in the general director's office said that the Muratov remark was premeditated and an emergency management meeting will be held to decide how to respond. KamAZ spokesman Nail Galiulin denied Muratov's statement. "General Director Sergei Kogogin has specifically stated that there have been no plans to cut the workforce," Galiulin said. He also admitted that sales in the first quarter were down by 18 percent compared to the same period of the last year. "In order to remain efficient, we are not replacing workers. Muratov's number (15,000 employees) is taken out of nowhere," Galiulin stated. Troika Dialog automotive analyst Andrei Kormilistsin agreed. He said, "I think it will be very hard to lay off so many people at once in KamAZ." However he said that KamAZ had a problem with overstaffing. According to the KamAZ leadership, the factory will produce auto parts that are in demand on the market, Interfax reported. In 2001, the factory produced 3.4 billion rubles ($108.6 million) worth of parts, five times more than in 1998. The Tatarstan government holds an 11 percent stake in KamAZ. (IAM)

WHAT'S UP? WHAT'S DOWN?

RUSSIAN CENTRAL BANK CUTS DEPOSIT RATES (5 June)

On 5 June, Russia's Central Bank cut deposit rates. According to Reuters, overnight rates fell from 4 to 3 percent, tomorrow next rates fell from 4.5 to 3.5 percent, and spot next rates fell from 5.0 to 1.3 percent. Yulia Tseplyaeva, an analyst with ING bank, responded to the cuts by saying, "It seems that the Central Bank is trying to make its deposit rates a benchmark for the market and make its instruments more efficient in controlling ruble liquidity," Reuters reported. Previously, Russia's Central Bank had relied on intervention instead of rates to regulate the money supply. The latest changes follow earlier cuts in deposit rates in May and cuts in refinancing rates in April. The 5 June cuts also included a reduction in one- and two-week deposit rates and a cut in call deposit rates from 5.5 to 4.5 percent. (TGP)

IN FOCUS

BAKU-CEYHAN OIL PIPELINE INEVITABLE (7 June)

David Woodward, the head of BP Azerbaijan, announced on 6 June that the development of the Baku-Ceyhan pipeline is inevitable. Though once criticized as too costly and lacking in sufficient oil resources, Woodward announced, "Today the project is not dependent on extra financing, extra crude volumes, or new participants," Reuters reported. The announcement follows a 31 May decision by the EBRD to fund 10 percent of the pipeline project that will link Azerbaijani oil fields to the Turkish coast. EBRD official Thomas Moser said, "We want to finance the Baku-Ceyhan project and are ready to fund $300 million before the end of 2002." Speaking to Reuters in Baku, Moser said that construction on the $2.9 billion, 1,730 km (1,075 mile) oil pipeline will commence in July with a target completion date of 2005. The pipeline is expected to carry up to 1 million barrels of crude oil per day between Azerbaijan and Turkey. An additional 20 to 30 percent of project costs will be absorbed by the BP-consortium that is leading the development effort. International financial institutions, including the International Finance Corporation, the U.S. Eximbank, and the Japan Eximbank will provide the remaining funds. The pipeline will follow the same path as a gas pipeline that is also operated by BP.

President George W. Bush has voiced strong support for the development of oil and gas pipelines from Azerbaijan to Turkey. In a letter to Azerbaijani President Heidar Aliev, Bush wrote that "Great progress has been made over the past year toward realizing our shared goal of an East-West corridor to transport Azerbaijani and other Caspian oil and gas to global markets," the AP reported. The development of the pipeline and opening of Caspian energy resources to world markets could provide the U.S. with an alternative to Persian Gulf oil. The newly developed pipeline would also limit the influence of Russia and Iran on Azerbaijan, Kazakhstan, and Turkmenistan. At present, oil shipped from Azerbaijan must pass through both Russian and Georgian pipelines. Although construction is set to begin in summer 2002, tensions in the region could potentially postpone the project's development. Georgia alone is faced with challenges in Abkhazia as well as in its border region, where U.S. trained troops are preparing for encounters with guerilla forces and Al-Qaeda fighters. Despite the challenges ahead, Bush told Aliev, "I look forward to even greater involvement of U.S. firms in the commercial development of Azerbaijan's energy sector and in fostering broad-based economic growth," the AP reported. Although Western oil companies are involved in Caspian Sea exploration for commercial purposes, they view the development of the pipeline as largely strategic and even symbolic. The proposed route they maintain is costly, and Caspian Sea oil is not likely to replace U.S. imports of Persian Gulf oil. Unlike the U.S., Russia does not view construction of the Baku-Ceyhan pipeline favorably. Success in transporting oil via this path will cut down on the transportation of reserves across Russian territory. As such, the new pipeline could serve to decrease even further Russia's influence on the region.

Efforts to promote the Baku-Ceyhan pipeline will move forward despite Russian concerns. The BP-led consortium involved in the construction project is expected to meet 19-20 June in order to make investment decisions, Reuters reported. The consortium will then spend the remainder of 2002 preparing the ground for the actual laying of the pipeline in early 2003. In responding to charges that the pipeline will experience oil shortfalls, Woodward told Reuters that Azeri-Chirag-Gunesli would have enough oil to fill the pipeline alone. "We have updated our forecast of recoverable reserves to 5.3 billion barrels from the previous 4.6 billion. The ACG project will be able to produce one million barrels per day by 2008," Woodward said. The update in reserve forecasting was one of the factors that increased financial institutions' confidence in the project and may have influenced the EBRD announcement. Woodward did admit that the Baku-Ceyhan pipeline may require additional volumes after 2015 when it is expected that ACG production will begin to decline. By that time, however, new projects should be operating in the region allowing for crude oil shipping. Woodward sees a comparison between the reserves available in the Caspian and those of the North Sea. If his estimates prove correct, there may be enough resources to support two to three major pipelines in the region. In 2003, the Baku-Ceyhan link will become the second major pipeline following the 2001 construction of a line from Kazakhstan to Russia. Woodward told Reuters, "A third pipeline could be built after 2010-2015 but it will be dependent on exactly where the additional volumes of oil are found and how the politics in the region develop." He added that a pipeline to Iran should not be ruled out. (TGP)